The Digital Silk Road: Lessons from Last Mile Distribution in China

This blog is authored by Stephen Deng, co-founder at DFS Labs, an early-stage fintech accelerator for emerging markets

Recently, I had the opportunity to join a group of donors, investors, entrepreneurs, and other stakeholders and spent a week in China to understand the dramatic digital financial revolution that the country has undertaken.

We quickly realized that China’s story is not just about the meteoric rise of its tech giants, but just as importantly, the layered set of last mile products and services that was built up to enable such fast growth. As much as this is a story of ecommerce, it is a story about how traditional, physical commerce has been adapted to a mobile-first economy.

After a week visiting a set of ecosystem players from corporate executives to end users, I came away with the following set of building blocks that have played a critical role in the evolution of China’s digital financial services:

Continual improvement of physical infrastructure

It would be shortsighted to discredit the critical role that years of massive infrastructure development has played. The backbone of China’s ecommerce revolution has been the smartphone and its supporting infrastructure; 2018 estimates suggest that China has over 699 million smartphone users. During our learning trip we saw how much focus there still is from companies like Huawei who are striving to upend the price to performance equation for these technologies.

Likewise, we cannot discount the importance of building out the literal last mile – the roads, bridges, and addresses which underpin physical delivery and location. The country’s One Belt One Road initiative underlines this focus and is set to reshape international commerce in as well. In China, we also saw examples of the next generation of this effort, including JD.com’s drone delivery for the remote last mile. Technological advances like autonomous hub-and-spoke delivery will continue to push China’s last mile infrastructure forward and continue to add new customers to its digital economy.

One of JD.Com’s Drones – taken during a visit to JD.Com’s offices in Beijing

Seamless last-mile delivery as a service

China’s ecommerce engine would not run without the parallel development of a group of last mile logistics companies. Alibaba has Cainiao, it’s tech-enabled logistics platform, but its the kuaidi (delivery and logistics) companies from Tonglu: Yunda, ZTO and STO that have been the physical backbone for the country’s ecommerce demands.

We found it especially important to understand how seamlessly these logistics services are integrated into a SME’s sales process. For example, 3 hours outside of Shenzhen, we met a shoe producer who grew his business from $10,000 to $50 million RMB in four years. From a small warehouse, he sells over a million pairs a year all over China by utilizing Alibaba’s various wholesale platforms Taobao and 1688 to reach customers and uses kuaidi services to deliver them. The SME owner just has to focus on creating the best products – marketing, payment, delivery and even returns are handled on the platform.

Helping to bring offline suppliers, online

In addition to last mile delivery, there is a stack of digital services that help suppliers adapt their previously offline businesses to the digital economy. One of the biggest areas of support relates to the necessity to collect, sort through, and make decisions around the massive amount of data now available to sellers. During our Live Learning trip, we saw a very cutting-edge example in Alibaba’s TMall Weijun Grocery where traditional convenience store owners were able to participate in a franchising package that includes the hardware, software, and insights to bring them into a big data world. Store owners gained access to foot traffic heat maps, customer online purchase histories, and regional shopping trends to inform restocking and store layout decisions.

Shopping at the Weijun Grocery Store in Hangzhou

Similarly, sellers were brought into a digital payments ecosystem, not only through Alipay and Wechat Pay’s QR code infrastructure, but also in online ecommerce with access to services that reduce barriers, such as working capital loans on Taobao and a digital escrow service to bridge the trust gap between online buyers and sellers.

In another key example, smaller sellers are able to livestream directly to an audience customers on Taobao, introducing otherwise undifferentiated products to thousands of potential buyers at once with a single smartphone.

Empowering new digital economy customers everywhere

None of the above layers would matter if end customers were not empowered to participate and spend money on ecommerce platforms. The ecommerce services made available to customers are designed to digitize offline purchases and increase online purchases. Prior to this trip, many of us were familiar with Amazon and the strength of its recommendation algorithms to guide and increase their customers’ online purchases. Thanks to the prevalence of mobile payments in China, the recommendation algorithms can be built on both online and offline shopping behaviors. Buyers are advertised the right products at the right times, no matter where they are.

Additionally, newer e-commerce buyers are able to spend more and with more confidence through a group of services including: unsecured digital loans and generous return policies adopted on platform like Taobao. For users who aren’t fully digitally literate, Taobao agents can provide digital education and even take cash orders to provide an easier onramp for newer, often rural customers.

Government reducing cost of entry to the ecosystem for first movers

Finally, the trip highlighted to us the large role the government played in setting up and supporting the ecommerce ecosystem. The initial rise of “Taobao villages” included government incentives that awarded top product producers with cash bonuses. A government focus on rural bank account ownership set the backbone for the debit features that allow Wechat Pay and Alipay to function, eliminating the otherwise daunting issue of cash-in, cash-out (CICO).

Inspired by our experiences in China we scanned recent trends in Africa in order to better understand the opportunities and challenges of using e-commerce platforms, with powerful last mile capabilities, to drive access to inclusive digital financial services. In Part 2 of this blog, we delve deeper into the implications for Africa, and explore new ideas and initiatives taking place on the continent.

This blog is part of a series focused on deep dives into learnings from our trip to China. Follow us on Twitter or LinkedIn to catch each blog and learn more about these insights. If you are interested in joining a Live Learning trip, get in touch!